Dear CitiStreet Funds Shareholders:
The global economic recovery that began during 2002 accelerated during
2004. Real GDP growth in the U.S. exceeded 4% during the year, a level similar
to the go-go years of the late 1990s and far different from the U.S.'s economic
experience earlier in the new millennium. World real GDP growth also exceeded 4%
during 2004. This level of global economic growth has not been observed since
the late 1980s. Virtually all economies grew--although China and India are
becoming increasingly recognized as a critical component of the global economic
engine. Trade imbalances between the U.S. and the rest of the world and budget
deficits in the U.S. widened significantly during the year. This led to a
significant decline in the value of the U.S. dollar against most major
currencies. Reflecting its desire to contain potential inflationary trends
resulting from this economic growth, the Federal Reserve Board began a process
of steadily raising the target Fed Funds rate during 2004. Short-term yields
rose from approximately 1% over the summer to over 2% by the end of the year.
Unexpectedly, the rise in short term rates did not impact long term yields.
Longer maturity interest rates remained mostly constant during the year.
Global economic growth thrived in spite of uncertainties during the year.
The war in Iraq and violence across the Middle East, rapidly rising energy
prices, and a U.S. Presidential election that frequently appeared quite close
all fueled uncertainty, typically a negative influence on global markets.
But uncertainty did not translate into lower market prices during 2004.
Equity markets across the globe finished the year quite strong. Investments in
the CitiStreet Funds did well during this period. The International Stock Fund
and the Small Company Stock Fund both gained approximately 15% during the year.
Investments in the Large Company Stock Fund rose approximately 10% during the
year. The Diversified Bond Fund also performed well. It returned approximately
4.5%, outperforming its target benchmark during the year.
We also have some exciting changes to share with you. The Board of
Directors recently approved a proposal to retain Oechsle International Advisors
LLC and Alliance Capital Management L.P. as subadvisers to the International
Stock Fund to replace Bank of Ireland Asset Management (U.S.) Limited and
Citigroup Asset Management Limited. The Board of Directors also approved a
proposal to retain Babson Capital Management LLC as a subadviser to the Small
Company Stock Fund to replace Travelers Investment Management Company. You will
receive additional information regarding this transition in an upcoming mailing.
Unlike many fund families, assets under management at the CitiStreet Funds
increased steadily during 2004, closing the year at $2.58 billion. This figure
was up almost 18% during the year and almost 60% over the past 3 years. Growth
at our Fund family has come from both significant market appreciation and
continuing contributions from our loyal shareholders. Today over 190,000 people
invest in CitiStreet Funds. We at CitiStreet Funds remain committed to offering
funds that seek competitive long term returns. We have a clear objective of
delivering value to our shareholders. We thank you for your continuing
confidence.
Very Truly Yours,
/s/ ROBERT C. DUGHIROBERT C. DUGHI
Chairman of the Board
CitiStreet Funds, Inc.
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CITISTREET INTERNATIONAL STOCK FUND
The CitiStreet International Stock Fund (I Shares) returned 14.84% for
the year ended December 31, 2004. The MSCI EAFE Index returned 20.70% for the
same period.
The following commentary was provided by BANK OF IRELAND ASSET
MANAGEMENT (U.S.) LTD. ("BIAM"), co-investment subadviser to the CitiStreet
International Stock Fund. BIAM managed 33% of the Fund as of December 31, 2004.
The final quarter of 2004 yielded healthy local currency returns in
nearly all regions, with European markets leading the way. The inverse
relationship between the oil price and equity performance was reinforced as most
markets rallied in line with the retreating price of oil (from $55 per barrel
early in the quarter to about $43 by year-end). The quarter was characterized by
a combination of euro strength and dollar weakness. Ongoing concern regarding
the dollar has been a major impetus behind euro appreciation. With little
evidence to support U.S. authorities' "strong dollar policy," and skepticism
over the possibility of a revaluation of the Chinese renminbi in the near term,
the euro has garnered the status of a relatively attractive alternative
currency.
Notwithstanding the topsy-turvy nature of the past year, the global
economy and the corporate world goes into 2005 in better condition than at the
beginning of 2004. At the start of 2004, the world was still concerned about
geopolitical conditions and upbeat economic forecasts had failed to feed through
to more jobs. In the United States that concern was soon soothed by a strong, if
intermittent, pattern of new job creation and as consumer demand accelerated
amid renewed confidence. This was evident in the housing market, a phenomenon
not restricted to the U.S. with instances of house price strength across the
globe. Japan and Hong Kong--two economies that had witnessed hefty declines in
property valuation in recent years--have recorded rebounds as confidence in the
sustainability of economic recovery increased.
The pattern in equity market activity has evolved during the year
although not in the manner that we anticipated. Earlier in the year, we expected
that the preference for high-beta, low-quality and small-cap stocks would begin
to reverse and for a while that appeared to be the case. As it turned out
though, the lure of riskier assets hadn't been exhausted and many such stocks
outperformed following the re-election of President George Bush in early
November.
Emerging and Pacific markets produced some of the best returns for the
period under review. Australia's All Ordinaries Index hit an all-time high,
while Hong Kong was back up to levels last seen in 2001. The continued strength
of China's economy and the demand emanating from that region for commodities,
goods and services remained a positive driver for growth. In the Eurozone
region, the continued slide in the U.S. dollar raised concerns for the
struggling Eurozone economy, curtailing interest rate expectations amid worries
about the impact on the export-oriented nature of growth in countries such as
Germany.
The lion's share of the absolute performance for the portfolio for the
year ending December 31, 2004 came from a strong fourth quarter. The portfolio
benefited in the fourth quarter from the performance of some of its key
financial-services holdings. Banks and related finance companies had struggled
to make headway earlier in the year as interest rate increases had already
started in the U.K. and appeared likely in the Eurozone. By the final quarter,
however, British monetary policy
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tightening appeared to have ended and the likelihood of increases in Europe had
diminished. Our telecommunication services holdings and a return to favor of
consumer staples stocks also made strong positive contributions. The relative
underperformance for the year was in part attributed to the large cap bias of
the portfolio holdings. We again saw the markets small and mid cap names
outperform the larger cap names for the year, as we did in 2003. Although this
trend reversed itself in the month of December which is positive news for the
large cap sector.
For the year ending December 31, 2004, E.ON increased almost 45%. The
company revealed plans to invest nearly $20 billion in the next three years to
maintain its existing infrastructure of power stations and to add new capacity.
Europe's second biggest utility said it would focus on power generation and
supply in central and eastern Europe to meet rising demand for energy as these
regions' economies expanded faster than its more traditional markets. ING rose
almost 37% in the calendar year. The Dutch financial services company continued
to focus on expanding its insurance activities and online banking services. ING
raised more than $700 million by selling shares in its Canadian unit, which is
the country's largest property and casualty insurer. The Netherlands based
financial services company is also selling shares in certain of its units in
Asia, Australia and Europe, as well as planning to sell its U.S. based ING
Capital Advisors division to finance its expansion. Telecom Italia climbed
nearly 44% over the year. The company sought to buy the shares it does not
already own in its wireless unit, Telecom Italia Mobile, for about $23 billion
in a cash share transaction. The deal would enable Telecom Italia to cut its
debt as well as bolster business as wireless services are expected to grow at a
faster pace than traditional fixed line phones.
Compass, the U.K. food service group, dropped 25% over the year as the
company disclosed a litney of problems ranging from having to take an
exceptional charge on one of its major UK distributors that ran into financial
difficulties to higher pension costs. After a careful study of the company's
fundamentals, we sold the position in October. A stock that was down slightly
for the year, yet we continue to hold in the portfolio, is BMW. The company hit
new all time sales numbers and has plans to introduce a number of new models to
the market. Sales in the US were up 31%, and business is thriving in Asia. The
weak US Dollar is a slight concern, but we feel confident that the vulnerability
is more than compensated for by the solid top-line growth that will flow from
the company's young product portfolio.
The global economy is in relatively good shape, although the pace of
growth will likely slow in 2005. Consensus estimates suggest that the
predominant U.S. economy should expand by about 3.5%. Given that the Federal
Reserve has implemented a series of five interest rate hikes in six months, it
is hardly surprising that growth is expected to moderate, although this still
represents above-trend growth.
Expectations of higher interest rates in the Eurozone region have
diminished, with the weakness of the U.S. dollar putting pressure on economic
prospects. The European Central Bank reduced its own estimate for GDP growth in
the euro area to 1.9% for 2005. Further afield, consensus estimates for Japanese
growth have been scaled back to 1.6%. Growth in both regions has been
export-led, so the relative strength in their currencies poses a competitive
question.
The U.S. dollar will continue to be a focal point for markets; trading
is likely to be volatile, with potential for the USD/EUR rate to test $1.40. The
dollar is cheap on a purchasing power parity.
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The following commentary was provided by CITIGROUP ASSET MANAGEMENT
LIMITED ("CAML"), co-investment subadviser to the CitiStreet International Stock
Fund. CAML managed 34% of the Fund as of December 31, 2004.
International markets posted their second strong year in succession, as
the MSCI EAFE rose 20% in US$ terms. International equity markets drifted for
much of the year due to increased tensions in the Middle East, higher oil
prices, and the perception that the accommodative U.S. interest rate cycle would
soon end, with possible adverse consequences for investment conditions
worldwide. Europe, in particular, was adversely affected by the Madrid train
bombings that occurred in March, leading to increased focus on the geopolitical
situation. But toward the end of the year, markets performed better
(particularly in Europe) on signs that oil prices had peaked for the time being,
and following a clear outcome in the U.S. election.
Returns for U.S.-based investors were further boosted by a fall in the
value of the U.S. dollar, compared with major overseas currencies. Among markets
in which the portfolio invested, the largest rises were noted in Norway, which
rose in excess of 50% in US$ terms, while the worst performing market was
Finland, which rose 6% in US$ terms. From a sector perspective, energy stocks
performed strongly during the year, on the back of rising oil prices, while the
technology sector performed poorly due to concerns over earnings prospects and
company valuations.
Against this background, our investment strategy continued to focus on
selecting companies that our analysis suggested were most attractive within
their international sectors. Our disciplined process is centered on a long-term
valuation framework that seeks to project cash flows and dividends several years
into the future. Shorter-term factors are also considered through an examination
of trends in corporate earnings forecasts. When constructing the Fund's
portfolio, we emphasize stock selection rather than geographic or sector
allocations.
During the year, our investment strategy led to solid stock selection in
Germany, Japan, the Netherlands and Switzerland. Conversely, stock selection in
Italy, Finland, Sweden and Singapore was less successful.
In Germany, the portfolio's holding in Schering AG enhanced results as
the shares increasingly reflected the potential of new drugs the company is
developing. Japanese stocks Toyota Motor and Takeda Pharmaceutical generated
strong returns, while in the Netherlands, holdings in Fortis and TPG were
positive for performance. In Switzerland, the portfolio was rewarded for not
holding a number of poor performing companies, such as Nestle, Novartis and
Adecco.
Our strategy was less successful in a number of other countries. In
Italy,Unicredito performed poorly due to difficult operating conditions in the
Italian financial sector. In Finland, paper company Stora Enso and communication
equipment provider Nokia proved detrimental to returns. Not owning Sweden-based
Ericsson hurt results, as it performed well as demand for mobile telephony
infrastructure improved. In Singapore, United Overseas Bank lagged the local
market.
The following commentary was provided by SSGA FUNDS MANAGEMENT, INC.
("SSGA"), co-investment subadviser to the CitiStreet International Stock Fund.
SSgA managed 33% of the Fund as of December 31, 2004.
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International equity markets had a strong rally to finish off the year,
and this strength was magnified by the weakness in the U.S. dollar (which helps
returns when translated back into dollar terms). The fundamentally improved tone
was long overdue given that nervous trading and skittish investor sentiment had
characterized market behavior in the earlier part of the year. Just as markets
had retreated earlier in the face of rising energy prices and geopolitical
instability, so in the fourth quarter a continued easing in energy prices
allayed lingering concerns that expensive oil might crimp economic growth. A
definitive result in the U.S. election removed another cloud of concern from
markets.
Our strategy for our portion of the International Stock Fund is to
invest in large, high quality companies with a growth bias. It is unsurprising
that the portfolio's performance lagged during 2004 in the face of these
stylistic headwinds. It was also hurt by the outperformance of the smaller
peripheral markets within EAFE, where stocks fitting its style criteria are
comparatively few. At a sector level, most of the relative damage was caused in
two areas: our overweight to Information Technology and stock selection within
the consumer area. In terms of our technology overweight, the impact on the
portfolio was considerably diminished when we took advantage of a long-awaited
bounce in many of these stocks towards year-end, selling Flextronics and much of
our semi-conductor exposure including ASML and SMIC. On the consumer side, the
media group BSkyB, bought as a late recovery play, lagged its peers, as did such
companies as Compass and Volkswagen (all three of which were sold). The best
returns in absolute terms were made among financials companies. Thus our top
contributor, the Dutch insurer/asset gatherer ING, appreciated over the course
of the year by almost 30%, while our move into Japanese banks was even more
rewarding (Mitsui Trust was up nearly 80% over 2004). We also benefited from our
overweight to energy, where the leading integrated oil companies such as Total
and BP fully reflected the move up in the oil price. Traditionally defensive
areas such as utilities, materials and industrials performed well, with our core
positions--E.On, CRH and the fertilizer company Yara--all ending among the top
contributors.
Over the course of 2004, we remained convinced that growth in the Asia
Pacific region would continue to outstrip that of other areas. We have added to
our position in companies oriented, not to export growth, but rather to a
resumption of domestic consumer demand at the expense of the more "growthy"
sectors such as consumer discretionary and IT. Consequently, many of the more
recently-established positions include such stocks as Coca-Cola Amatil, the
Australian Coke bottler; Johnson Electric, a Hong Kong-based micro-motor
supplier; and Singapore Telecom. Sun Hung Kai, the Hong Kong real estate
developer has been a core holding throughout most of 2004 and one of the Fund's
best performers.
Although our strategy struggled over 2004, it is worth repeating that
the extent of conviction in our growth philosophy remains strong. Growth stocks
were punished disproportionately in comparison with value stocks for most of
2004, with those high quality companies with sustainable earnings power being
shunned by markets in favor of their smaller cap, lower quality counterparts.
While this phenomenon had been expected to diminish over the course of the year,
it did not do so. The team retains their view that, in a period of rising
interest rates and an increasing cost of credit, 2005 will be the time when
these high quality, well-capitalized companies will at last be rewarded. Indeed,
the strength of this case seems even more compelling now than before, especially
in the light of our expectations of moderate global growth this year.
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CITISTREET SMALL COMPANY STOCK FUND
The CitiStreet Small Company Stock Fund (I Shares) returned 14.94% for
the year ended December 31, 2004. The Russell 2500 Index returned 18.30% for the
same period.
The following commentary was provided by TCW INVESTMENT MANAGEMENT
COMPANY ("TCW"), co-investment subadviser to the CitiStreet Small Company Stock
Fund. TCW managed 33% of the Fund as of December 31, 2004.
Much to everyone's surprise this year, small cap stocks significantly
outperformed large cap. With small cap total returns trouncing large caps by
over 60%, 2004 was the fifth year in a row it was better to think small rather
than big. While we were pleased with the portfolio's performance, we were
disappointed not to have captured more of the gains, particularly in the
explosive fourth quarter. What was right with the strategy was our value
orientation, focus on higher quality, and strong fundamentals for the first
three quarters.
However, four major forces slowed relative returns versus the our style
benchmark (the Russell 2000 Value Index) in the fourth quarter: 1) early tax
loss selling in mutual funds, where the fiscal year ends are generally either
October or November, led to sharp upward reversals in down trodden stocks once
the selling pressure was off; 2) dismal returns for most of the year led
investors to pile on into higher beta stocks hoping for a year end rally; 3) the
increased popularity of "exchange traded funds" known as ETFs over the last few
years as short term trading vehicles, virtually mini index funds, causing most
active small cap managers to underperform the indexes; 4) Investment banking
activity, especially initial public offerings, have seeped temporarily away
traditional small cap fund flows. So, while our portfolio has outperformed the
Russell 2000 Value Index over the last three, five and seven years because of
our concentration in strong and improving cash flow, higher quality companies,
we would expect to lag when more speculative companies do better in markets that
trend up sharply.
We believe we are in an extended value cycle, similar to the period of
the mid to late 1970s when value was in favor for 10 of 12 calendar years. The
reason is the markets in 1973 and 1974 collapsed 45% after an unsustainable
build up in valuations of the "nifty fifty" consumer growth stocks, the Vietnam
war and the first Arab oil embargo in 1973. It took investors quite a long time
for the bitterness of that down market to pass, which laid the groundwork for
the new bull market in 1982. Even early in the bull market, from 1982 through
1984, value stocks led the way before growth came back into favor in 1985. While
small cap value-oriented strategies have done even better than large cap growth
over the last five years, they should have; due to faster growth rates and more
attractive valuations. Today, small cap valuations are closer to historical
average and often the pendulum swings to extremes. Lower interest rates and the
investors' positive reaction to smaller cap stories could still provide the
backdrop for continuing small cap gains. No matter what phase of the cycle we
are in, experience has clearly demonstrated the benefits of diversification.
Innovative, attractively valued, small cap companies should continue to
outperform over our investment time horizon. All in all, we are sticking with
our time-tested discipline: "The Search For Value Poised For Growth."
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The following commentary was provided by TRAVELERS INVESTMENT MANAGEMENT
COMPANY ("TIMCO"), co-investment subadviser to the CitiStreet Small Company
Stock Fund. TIMCO managed 33% of the Fund as of December 31, 2004.
The economic expansion entered its fourth year at the close of 2004. Led
by strong consumer and business investment demand, the balance of growth was
quite healthy. Job growth accelerated last year, as continued profit growth
increased corporate willingness to hire. Strong consumer and business
fundamentals look to continue into 2005 and consumer spending looks to
strengthen further relative to last year. Energy prices remain a primary focus
of many economists. Oil prices hit $55 a barrel late in October and were at $50
by the end of November. Nevertheless, inflation remains modest despite the rise
in oil prices. Inflation began to rise modestly in 2004 as shortages in certain
goods and commodities developed around the world. Ongoing economic recovery and
rising price pressures caused the Fed to begin a series of 25 basis point
tightening in mid-2004 which look to continue well into 2005. The Consumer Price
Index rose slightly during the second half of the year. In 2005, inflation
pressures look to rise as healthy growth continues to improve corporate pricing
power.
After-tax corporate profits, adjusted for inventory and depreciation,
fell in the last quarter of 2004. The data were actually better than they
appeared. The Bureau of Economic Analysis indicated that insurance-related costs
of the hurricane season were higher than in the same period last year. Without
the impact on insurance payments and uninsured losses, corporate profits would
have been much higher. Encouraged by the economy's performance, the Federal
Reserve raised rates five times in the last year. With inflation and interest
rates no longer falling, returns on financial assets and housing likely will be
much lower. Consequently, we believe that the current savings rate must rise and
consumption must fall in order for investors to save for retirement.
With improving earnings fundamentals, the equity market performed well,
particularly during the fourth quarter of the year. Energy stocks were among the
biggest contributors because of historically high oil prices and solid earnings.
As investors began to focus their attention on higher quality stocks with solid
dividends and strong cash flow, less-cyclical industries such as foods,
chemicals, and building materials also realized substantial gains. The outcome
of the presidential election removed some uncertainties surrounding the health
care and defense industries. However, technology stocks were generally weak
despite an impressive start in January. Concerns over terrorism, oil prices and
weak profits also led to a significant decline in the Auto & Transportation
sector, especially within airlines. In the next several weeks, as retail sales
data from the holiday season trickle out, the equity market could potentially
experience more volatility as investors reposition their portfolios for the
coming year.
In our disciplined approach to stock selection we use a stock selection
model to screen our research universe of over 1,300 small cap securities for
companies that offer improving earnings fundamentals at discounted stock
valuations. We continue to focus on this dual theme of low valuations and
improving earnings outlook as the basis of our stock selection.
Our stock selection model generated mixed results last year. Among the
earnings factors, estimates revisions and diffusions continued to be anemic,
while the earnings surprise showed signs of improvement. The disappointing
performance of our earnings factors could be attributed to the proliferation of
short-term trading and hedged funds, which react rapidly to earnings news. The
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recent change in corporate communications to ensure fair information disclosure
(Regulation Fair Disclosure) might also have played a role in diminishing the
effectiveness of our earnings factors. However, our valuation factors produced
slightly positive returns. The earnings multiple also performed well,
particularly in the Consumer Staples and Finance sectors. The price-to-cash flow
ratio and the price-to-book ratio generally posted moderate gains, and
contributed to the overall performance of the quantitative model.
Stock selection, primarily in the Finance and Consumer Discretionary
sectors, contributed positively to performance during the period. However, in
general, our holdings in the Technology and Producer Durables sectors did not
perform. Some of the biggest individual contributors to performance were
Atherogenics, American Medical Systems, and Landstar System. Atherogenics
received favorable clinical data on a preliminary study of its new drug during
the third quarter. The stock surged after the news was released. American
Medical Systems announced government approval for its new treatment of
urological disorders. Investors expected the new treatment to generate
substantial revenue for the company in the next several years. As a result, the
stock traded higher. Landstar System traded higher due to strong demand for
commercial delivery drivers and increased its revenue substantially in the
trucking business. Conversely, America West Holdings, Transmeta, and Sharper
Image negatively impacted our performance. America West suffered from worries
that its domestic revenue might be weaker than expected in the second quarter.
While its international business operations continued to realize healthy growth,
the lack of growth from its domestic operation added pressure to the stock.
Transmeta also fell on concerns that the company might not meet its earnings
expectation during the second quarter. Analysts worried that the lack of recent
announcements on new design contracts could lead to a profit disappointment.
Sharper Image suffered from slower revenue growth due to soft demand for its new
products. The consensus earnings estimate for the second quarter was reduced to
adjust for the difficult market environment.
The following commentary was provided by SSGA FUNDS MANAGEMENT, INC.
("SSGA"), co-investment subadviser to the CitiStreet Small Company Stock Fund.
SSgA managed 34% of the Fund as of December 31, 2004.
The portion of the Small Company managed by SSgA uses a passive
approach, designed to keep the overall risk exposures tight to the benchmark
index, the Russell 2500. Tracking was within expectations for the year.
The strong equity markets of November and December helped turn a
lackluster year into a fairly impressive one. This was more than welcome news
after experiencing small positive returns in the first half of the year and a
difficult market during most of the third quarter. Equity markets worldwide
began 2004 with a continuation of their uptrend, spurred by solid profit reports
and positive guidance from a broad range of companies. In late January, however,
the U.S. Federal Reserve Board removed the phrase "considerable period" from its
policy statement, forcing investors to confront anew the prospect of higher
short-term interest rates later in the year. A host of factors conspired to
upset financial markets in April, a month that began with an impressively robust
U.S. employment report. Unfortunately, the otherwise welcome rebound in job
creation reawakened investor fears of rising interest rates. After a nice
rebound in June, the equity market sank in July and August fueled by
second-quarter earnings releases that failed to offer enough exuberance
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regarding the second half of the year, a stunningly weak July jobs report and a
sharp rise in crude oil prices. In the fourth quarter, with the US presidential
election decided, and relief from surging energy prices, there was a renewed
sense of investor optimism.
The Russell 2500 Index finished strong for the year by getting a boost
from its small cap stock constituents, which dominated for a fourth consecutive
year. Across Russell 2500 sectors, Energy (+41.1%), Materials (+29.1), and
Industrials (+21.5%) were top performers for the year. All other sectors with
the exception of Information Technology (-1.3%) produced positive returns for
the year.
The top contributors to the Russell 2500 Index's return for the year
included Sirius Satellite Radio (+141.14%), Sepracor Inc. (+148.10%) and ImClone
Systems Inc. (+16.19%). The bottom contributors included Ciena Corp. (-49.09%),
Sanmina-SCI Corp. (-32.78%) and Foundry Networks Inc. (-51.85 %).
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CITISTREET LARGE COMPANY STOCK FUND
The CitiStreet Large Company Stock Fund (I Shares) returned 10.04% for
the year ended December 31, 2004. The S&P 500 Index returned 10.87% for the same
period.
The following commentary was provided by WELLINGTON MANAGEMENT COMPANY,
LLP ("WELLINGTON"), co-investment subadviser to the CitiStreet Large Company
Stock Fund. Wellington managed 34% of the Fund as of December 31, 2004.
Moderate economic strength and continued growth in corporate profits
overshadowed investors' concern regarding rising inflation, increased oil
prices, acts of terrorism, and turmoil in Iraq during the twelve-month period
ended December 31, 2004. All major indexes posted positive returns during
period. Small caps remained strong, as the Russell 2000 Index gained 18% versus
11% for the Russell 1000 Index, capping the sixth-consecutive year of small cap
outperformance relative to large cap. Value significantly outperformed growth,
as the Russell 1000 Value Index returned 16% versus 6% for the Russell 1000
Growth. Within the Russell 1000 Value Index, all ten broad industry sectors
posted positive returns. Energy and Utilities were the best performing sectors.
For the full year, the portfolio's bottom-up investment approach
produced positive benchmark-relative results in four of the ten broad market
sectors. Strong stock selection within Financials, Utilities and Health Care
contributed most to relative performance. However, these favorable decisions
were slightly offset by weaker security selections in Materials, Industrials and
Information Technology.
On an absolute basis, TXU (Utilities) was a stand out performer in the
portfolio as the new CEO made rapid progress towards achieving some of his
objectives in turning around the company. A few bank stocks also positively
contributed to performance. Bank of America continued to benefit from the
acquisition of FleetBoston Financial. Despite the challenging operating
environment, Freddie Mac appreciated as the new management made steady progress
of rebuilding the company. Shares of Hibernia increased due to strong
fundamentals and successful merger with the Coastal Bancshares.
Positive results were partially offset by the decline of American Power
Conversion (Industrials), a holding that the portfolio held in the first half of
2004. American Power Conversion fell sharply after the company announced
lower-than-expected earnings caused by increased sales and marketing costs as it
sought to boost market share. Maxtor and Hewlett-Packard (both in Information
Technology) also detracted from this period's performance. Hard-disk drive
manufacturer Maxtor declined amid concerns regarding industry pricing and
profitability. The security had been eliminated from the portfolio by the end of
the period. Shares of Hewlett-Packard declined as investors were concerned about
the weakness in the service area.
The following commentary was provided by SMITH BARNEY FUND MANAGEMENT
LLC ("SMITH BARNEY"), co-investment subadviser to the CitiStreet Large Company
Stock Fund. Smith Barney managed 33% of the Fund as of December 31, 2004.
From terrorism to the presidential election, macro risks dominated the
investment landscape in 2004. With the certainty created by electing the
incumbent and the likely continuance of his
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policies, from taxes to healthcare insurance, the market rallied. With strong
earnings in the first three quarters of the year, valuations were reasonable and
the markets had room to expand. Most of the indices approached or closed above
their 3 1/2 year highs. Even the continuation of higher interest rates could not
offset investor enthusiasm for equities.
Several dominant trends remained in place in 2004, with the continuation
of the dominance of small stocks relative to large stocks having the biggest
relative impact to the portfolio. Our strategy remains focused on investing in
stocks with growth prospects greater than the overall market. We look for
quality companies with superior business models and dominant market share, often
skewing our portfolio towards mega-capitalization companies. While this bias
towards larger companies created some headwinds in 2004, stock selection had the
largest impact on the portfolio.
One hundred percent of the shortfall versus the Russell 1000 Growth
Index, our style benchmark, in 2004 was due to stock selection. The primary
culprit, representing approximately 80% of the shortfall, was in the consumer
discretionary sector. Two decisions negatively impacted the portfolio: We owned
Interactive Corporation and were underweight Ebay. Interactive Corporation, a
leading Internet travel company with diverse businesses ranging from the Home
Shopping Network to Expedia, suffered from slowing revenue growth and poor
management execution. Despite being 2003's best performing stock, Interactive
proved to be more counter-cyclical than we were expecting. As the economy
continued to improve, it was hurt by lack of inventory due to increased
competition from hotel operators like Hilton and Marriott, thus negatively
impacting its growth rate. In addition, the management team did not progress
toward its goal of integrating diverse businesses into a cohesive operating
strategy, highlighted by the recent decision to separate the company. Several
names we did not own or were underweight, like Ebay and Yahoo, advanced
significantly, detracting from relative results. Despite spending time with each
management team we could not get comfortable with their reinvestment
opportunities and their respective valuations. This was a mistake. In a year in
which large cap growth stocks, as measured by the Russell 1000 Growth Index, had
low volatility and relatively weak results, mistakes were magnified.
Despite a frustrating year from a relative performance perspective,
there were some areas to highlight. In two challenging growth sectors,
healthcare and consumer staples, both of which underperformed the broad market
average, stock selection contributed positively. Several new stocks, like United
Healthcare, Biogen and Gilead were added to the portfolio. Within the consumer
staple sector, Wrigley and Hershey contributed to results.
Seventy percent of our new buy ideas outperformed the benchmark as of
December 31, 2004, with highlights like Network Appliance and Veritas up 60% and
40%, respectively. However, despite rigorous effort and the introduction of
several new names we were unwilling to take excessive risk to try to maximize
short-term results. This led us into taking too little active risk on new
positions. In a market dominated by macro economic factors, we did not believe
it was prudent to make a large tracking error bet. We believe our low volatility
approach and proven investment process can lead to long-term success.
We are optimistic about 2005. We believe several factors could lead to
investors migrating towards large capitalization growth stocks. As earnings
growth decelerates for the broad market, we expect investors to pay a premium
for companies that can truly grow. We believe that, after five years
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of underperformance, growth stocks are not expensive relative to value stocks.
We anticipate the depreciating dollar to favorably impact large capitalization
stocks relative to small stocks and expect their strong balance sheets to
support reinvestment opportunity and dividend growth.
We thank you for your continued support and will continue to work
diligently to achieve success on behalf of our investors.
The following commentary was provided by SSGA FUNDS MANAGEMENT, INC.
("SSGA"), co-investment subadviser to the CitiStreet Large Company Stock Fund.
SSgA managed 33% of the Fund as of December 31, 2004.
The portion of the Large Company Stock managed by SSgA uses a passive
approach, designed to keep the overall risk exposures tight to the benchmark
index, the S&P 500 Index. Tracking was within expectations for the fourth
quarter and the year.
The strong equity markets of November and December helped turn a
lackluster year into a fairly impressive one. This was more than welcome news
after experiencing small positive returns in the first half of the year and a
difficult market during most of the third quarter. Equity markets worldwide
began 2004 with a continuation of their uptrend, spurred by solid profit reports
and positive guidance from a broad range of companies. In late January, however,
the US Federal Reserve Board removed the phrase "considerable period" from its
policy statement, forcing investors to confront anew the prospect of higher
short-term interest rates later in the year. A host of factors conspired to
upset financial markets in April, a month that began with an impressively robust
US employment report. Unfortunately, the otherwise welcome rebound in job
creation reawakened investor fears of rising interest rates. After a nice
rebound in June, the equity market sank in July and August fueled by
second-quarter earnings releases that failed to offer enough exuberance
regarding the second half of the year, a stunningly weak July jobs report and a
sharp rise in crude oil prices. In the fourth quarter, with the US presidential
election decided, and relief from surging energy prices, there was a renewed
sense of investor optimism.
The S&P 500 Index finished strong for the year, hitting a 3 1/2 year
high and ending 2004 with a solid gain. Having shown their dominance for a
fourth consecutive year, small-capitalization stocks as represented by the
Russell 2000 Index coasted to the finish line in 2004, with an 18.3% gain for
the year.
Across S&P 500 sectors, Energy (+30.9%), Utilities (+25.5%), and
Telecommunications (+19.9%) were the top performers for the year. All other
sectors produced positive returns for the year, with the lowest sector returns
in Health Care (+1.5%), Information Technology (+2.7%) and Consumer Staples
(+2.8%).
The top contributors to the S&P 500 Index's return for the year included
Exxon Mobil Corp. (+25.02%), General Electric Co. (+17.82%) and Johnson &
Johnson (+22.76%). The bottom contributors were Pfizer Inc. (-23.89%), Intel
Corp. (-27.02%) and Cisco Systems Inc. (-20.26%). There were nineteen stocks
added and deleted from the Index during the year, 7 additions and 12 deletions.
Overall, turnover in the S&P 500 Index remained low in 2004 at 3.1%.
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CITISTREET DIVERSIFIED BOND FUND
The CitiStreet Diversified Bond Fund (I Shares) returned 4.65% for the
year ended December 31, 2004. The Lehman Brothers Aggregate Bond Index returned
4.34% for the same period.
The following commentary was provided by WESTERN ASSET MANAGEMENT
COMPANY ("WESTERN"), co-investment subadviser to the CitiStreet Diversified Bond
Fund. Western managed 30% of the Fund as of December 31, 2004.
We are pleased that our investment strategies helped produce positive
results for the Fund for the past year. The biggest contribution to performance
came from a moderate overweighting of the credit sector with an emphasis on
longer-maturity BBB-rated bonds, as this benefited from an impressive tightening
of spreads. An overweight exposure to longer maturity TIPS for most of the
period also contributed to performance, thanks to lower real yields and
higher-than-expected inflation. Modestly overweight exposure to the
mortgage-backed sector for most of the period added to performance as spreads
tightened. Duration exposure was neutral to somewhat short for the period, and
this detracted from performance since most yields rose by less than forward
rates had anticipated. A barbelled exposure to maturities had a positive impact
on performance, since the yield curve flattened.
Our outlook for the U.S. economy is unremarkable, with headwinds and
tailwinds likely to keep growth in the range of 3-4%. On the plus side, we note
that corporate coffers are stuffed with an abundance of profits, so capital
spending is likely to continue to post strong gains. Bush's tax cuts continue to
have ripple effects, increasing the marginal propensity to invest, and we are
likely to see further stimulative tax policies implemented later this year. The
burden of government spending, far from excessive by recent historical
standards, seems unlikely to increase and might decline if Congress implements
even minimal spending restraint.
On the negative side, productivity growth is no longer what it used to
be, thanks in part to the reemergence of pricing power, which in turn is a
consequence of several years of very accommodative monetary policy. Easy money
has imparted a mild, upward bias to inflation that could linger into next year,
with CPI inflation of 3% or more. Labor costs are rising, and margins are under
pressure. These developments, coupled with the fact that profits are at
historically high levels relative to the economy, suggest it is very unlikely
that profits will continue to grow at an above-average pace; the bloom is off
the profits rose, so to speak. Housing activity, driven in large part by
declining interest rates, appears to have peaked now that interest rates are no
longer declining. Energy prices remain elevated.
Markets have been obsessed with the current account deficit this past
year, but it needn't be a harbinger of disaster. It is not necessarily a sign of
over consumption on the part of the U.S. consumer, and it could well be a sign
of under consumption on the part of global consumers. Whatever the cause of the
deficit, the U.S. economy has been the net beneficiary of strong investment
flows, which in turn have helped to restore household net worth to its 2000
glory and to generate two years of above-trend growth. The jobs market is
healthy, equity prices are rising, and household debt service burdens are
non-threatening. The prospect of tighter Fed policy should provide support for
the dollar, and households are net beneficiaries of rising interest rates.
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We see little value in U.S. bond yields at current levels, given our
view that inflation is likely to prove somewhat higher than the market expects,
and yields are still priced to the assumption that inflation will remain
relatively low and stable. Consequently, we continue to target an underweight
duration exposure. Our yield curve exposure retains a modest flattening bias
that should be rewarded as the Fed moves eventually to restore real short-term
rates to a level that is consistent with stable inflation. Credit spreads are
very tight, so we remain neutral to somewhat cautious on the credit sector, but
continue to hold an overweight exposure to the lower quality areas at the
expense of the higher quality areas, since leveraged borrowers should benefit
disproportionately from the current moderate-growth, still-easy-money
environment.
Spreads on mortgage-backed securities have declined to historically low
levels, leading us to adopt a substantially underweight exposure to the sector,
with a bias to overweight GNMAs for their better convexity qualities. Volatility
has fallen and complacency has risen by enough to leave the MBS sector seriously
exposed to unexpected developments. We continue to hold a moderate exposure to
TIPS since they should do well even if inflation rises only mildly, but have
shifted our holdings to shorter maturities in order to minimize duration risk
should the Fed tighten by more than expected.
The following commentary was provided by SALOMON BROTHERS ASSET
MANAGEMENT, INC. ("SALOMON"), co-investment subadviser to the CitiStreet
Diversified Bond Fund. Salomon managed 34% of the Fund as of December 31, 2004.
As widely anticipated, the Federal Reserve Bank (the "Fed") raised its
federal funds target rate in 2004, bringing it to 2.25% at year end from 1.0%,
which had been its lowest level in more than 40 years. Even though the market
fully expected the 25-basis-point hike in the federal funds rate in late June
and in each successive meeting thereafter, the wording of the statements
following the meetings still generated some anxiety. The Fed continued to
reiterate that it would increase rates "at a pace that is likely to be
measured," but also added that "the Committee will respond to changes in
economic prospects as needed to fulfill its obligation to maintain price
stability." The 10-year U.S. Treasury note ended the year relatively unchanged,
after reaching its low of 3.68% in March and then hitting its high of 4.87% in
June. The 10-year U.S. Treasury market rallied after the Fed's initial 25 bp
rate hike, and remained range bound for the remainder of the year.
Most of the year was characterized by investors dissecting language from
the Fed for clues on its assessment of the U.S. economy and on the pace of rate
hikes. The U.S. economy's quarterly pace of growth continued to advance and the
economy entered its fourth year of expansion since the 2001 recession. Although
a series of one-off events--surging oil prices, hurricanes, the waning effects
of 2002-2003 tax cuts, etc.--undoubtedly restrained growth in 2004, the economy
proved resilient enough to grow 4% over the past four quarters. Even the U.S.
labor market, which generated lackluster results throughout most of 2003,
improved over the past year, but the pace of improvements was uneven from month
to month. Given the combination of strong gross domestic product ("GDP")
results, comments from the Fed about a more robust economy, improvement in job
growth and a pick-up in inflation, the economy appeared to be firing on all
cylinders.
"Spoiled investors" settled for a "good" year in the corporate bond
world. Credit fundamentals continued to improve. The sector saw tremendous
demand from international investors, which
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provided a strong technical backdrop for the asset class. Investment grade debt
spreads ended 2004 at their tightest levels for the year since 1998.
The ABS market did not disappoint in 2004, putting in one of its
stronger years on record. Spreads in most sectors generally tightened through
2004, particularly the credit card and auto sectors. Relatively light issuance
in non-mortgage ABS and on the fixed rate side largely drove the trend along
with improving credit fundamentals.
The high yield market continued to rally during the fourth quarter,
gaining 4.73%, as represented by the Citigroup High Yield Market Index. The
Fed's commitment to measured policy tightening combined with lower oil prices
kept market volatility in check. Fundamentals remained solid, supported by
strong balance sheets and historically low default rates, which continued to
decline as the improving economy and the low interest rate environment enabled
companies to extend their debt maturities and improve their liquidity.
Technicals also remained robust, with mutual fund inflows increasing to almost
$1.5 billion for the quarter, continuing the positive momentum begun in the
third quarter versus the first half's significant outflow activity.
The following commentary was provided by SSGA FUNDS MANAGEMENT, INC.
("SSGA"), co-investment subadviser to the CitiStreet Diversified Bond Fund. SSgA
managed 36% of the Fund as of December 31, 2004.
The portion of the Diversified Bond Fund managed by SSgA uses a passive
approach, designed to match, as closely as possible, the return of the Lehman
Brothers Aggregate Bond Index benchmark utilizing a replication approach at the
issuer level and a sampling approach at the issue (security) level.
Toward the middle of 2004 the Federal Reserve began its "measured"
tightening campaign. As a result, the Treasury curve flattened, spread product
tightened and volatility for the second half of the year was much lower than in
the first half. Ten year Treasuries ended the year where they began, at roughly
4.25%. Rates started moving up in April when it became clear from the economic
data (non-farm payroll reports and various inflation indicators) that the
economic recovery was indeed sustainable and that the Fed would continue to
raise rates. Rates grinding lower and hovering around the 4.20% level for the
latter part of the year was market testament to the faith it had in the Fed's
ability to manage inflation without severely dampening economic growth. The
yield curve flattened with two-year yields increasing 125 bps and ten-year
hardly moving. The two-year increase was the same magnitude as the increase in
the Federal Funds rate over the course of the year. The spread between the
ten-year yield and the two-year yield went from 2.40% to 1.13%. Fed Funds ended
the year at 2.25%.
When the market started pricing in the Fed's expected measured interest
rate hikes, LIBOR also moved up slowly and consistently with Fed Funds. As might
be expected, swap spreads performed similarly to interest rates, grinding
tighter during the second half of the year and ending the year a few basis
points wider than where they stood at the beginning of the year. Volatility also
peaked in the beginning of May and ground lower for the balance of the year,
hitting lows at year end not seen since 2000. Spread product, including high
yield, was tighter for the year, also hitting lows not seen since 1998. Demand
for spread product by foreign buyers was very robust in 2004, helping to
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cause excess and total returns to be positive for all asset classes within the
Lehman Brothers Aggregate Bond Index.
Within the credit segment of the market in 2004, fundamentals all proved
to be good for the market return. Companies have increased their cash holdings
and have decreased their net debt outstanding. Bank lines have become more
available, lessening the need for companies to issue debt. From a technical
perspective, 2004's net corporate supply was the lowest it has been since 1997.
Technical factors in the mortgage backed securities (MBS) market segment
were robust in 2004 with fixed rate supply down for the year and foreign demand
very strong. Hybrid adjustable rate mortgage issuance represented about 20% of
total production in 2004. Demand from agencies began to wane while the
aforementioned foreign investor demand was relatively robust during the year.
Within the asset-backed securities (ABS) segment, issuance in 2004 was
strong, outpacing corporate issuance for the first time in history. Subprime
mortgage product accounted for almost half of total issuance. Spreads ended the
year at all time tight levels, driven by collateralized debt obligation (CDO)
creation, hedge fund purchases, foreign buying, and corporate investors.
For collateralized mortgage backed securities (CMBS), the average spread
tightening in 2004 was about 15 basis points, contributing to the sector's
posting an excess return number for the year of 117 basis points. Lower quality
securities tightened the most.
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FUND EXPENSES
As an investor in the CitiStreet Funds through a variable contract or a
qualified plan, you incur ongoing costs, including management fees and other
Fund expenses. Investors in the R Shares also incur ongoing distribution and
service (12b-1) fees and administrative fees. This Example is intended to help
you understand your ongoing costs (in dollars) of investing in I Shares and R
Shares of the Funds and to compare these costs with the ongoing costs of
investing in other funds. This example does not reflect fees and charges under
your variable contract or qualified plan. If contract or plan charges were
included, the costs shown below would be higher. For variable contract
investors, please consult the prospectus for your contract for more information
about contract fees and charges. For retirement plan investors, please contact
your retirement plan sponsor or recordkeeper for more information about any plan
fees and charges.
The example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period as indicated below.
ACTUAL EXPENSES
The first line under each share class in the table below provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate the
Fund expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000=8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the Fund expenses you paid on your
account for this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line under each share class in the table below provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any contract or plan fees and
charges, such as sales charges (loads), insurance charges or administrative or
recordkeeping charges. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if contract or plan fees or
charges were included, your costs would have been higher.
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Portfolio of Investments
CitiStreet Funds, Inc. / Diversified Bond Fund / December 31, 2004 (continued)
SECURITY ABBREVIATIONS:
FSA -- Financial Security Assurance Co.
G.O. -- General Obligation
REIT -- Real Estate Investment Trust
TBA -- Delayed Delivery Transaction (Total Cost $47,047,141).
Yankee-Dollar -- U.S. Dollar denominated bonds issued by non-U.S. companies or
foreign governments and traded on an exchange in the U.S.
NOTES TO THE PORTFOLIO OF INVESTMENTS:
* -- Non-income producing security.
# -- Represents security, or portion thereof, on loan as of December 31,2004.
(a) -- 144A securities. Securities restricted for resale to Qualified
Institutional Buyers.
(b) -- Indicates a variable rate security. The rate shown reflects the current
interest rate in effect at December 31, 2004.
(c) -- Indicates a security with a step coupon. The security is issued with a
zero coupon and steps to the stated coupon at a predetermined date and
remains in effect until final maturity.
(d) -- Represents a security which is fair-valued.
(e) -- Security is issued with a zero coupon. Income is recognized through the
accretion of discount.
(f) -- Security currently in default.
(g) -- Represents a Treasury Inflation-Protected Security (TIPS). The interest
and redemption payments for TIPS are tied to inflation as measured by
the Consumer Price Index.
(h) -- All or a portion of these securities have been pledged to cover
collateral requirements for open futures.
(i) -- All or a portion of these securities have been pledged to cover
collateral requirements for delayed delivery transactions.
(j) -- Rate quoted represents the seven day yield of the Fund.
(k) -- Indicates an affiliated issuer.
(l) -- Represents security purchased with cash collateral received for
securities on loan.
(m) -- Repurchase agreement dated 12/31/04, due 1/3/05 with a repurchase value
of $47,208,653. Collateralized by $48,270,000 Federal Home Loan Bank
2.375% due 4/5/06. The aggregate market value, including accrued
interest, of the collateral was $48,144,565.
The accompanying notes are an integral part of the financial statements.
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004NOTE 1. ORGANIZATION
CitiStreet Funds, Inc., (the "Company"), was organized as a Maryland corporation
in December 1992. It is registered under the Investment Company Act of 1940 as
an open-end diversified management investment company. It consists of four
separate funds (each a "Fund", collectively the "Funds"): CitiStreet
International Stock Fund ("International Stock Fund"), CitiStreet Small Company
Stock Fund ("Small Company Stock Fund"), CitiStreet Large Company Stock Fund
("Large Company Stock Fund") and CitiStreet Diversified Bond Fund ("DiversifiedBond Fund").
The Funds currently offer two classes of shares: I Shares and R Shares. Both the
I Shares and R Shares are authorized to issue up to 100,000,000 shares at a par
value of $.01 each. Expenses of the Funds are borne pro-rata by the holders of
each class of shares, except for an administrative fee and a distribution fee of
up to 0.10% and 0.25%, respectively, of the average daily net assets of the R
Shares. Each class votes separately as a class only with respect to its own
distribution plan (R Shares only) or other matters that relate only to that
class. Shares of each class would receive their pro-rata share of the net assets
of the Funds (after satisfaction of any class-specific expenses) if the Funds
were liquidated. In addition, the Company declares separate dividends on each
class of shares. The R Shares commenced operations on October 1, 2002.
For each Fund, I Shares are offered only to life insurance company separate
accounts to serve as the underlying investment vehicle for variable annuity and
variable life insurance contracts; qualified retirement plans, including
sec.403(b) arrangements, as permitted by Treasury regulations; and insurance
companies and their affiliates. The R Shares are available only through
qualified retirement plans (including sec.403(b) arrangements, as permitted by
Treasury regulations), that require a fee from Fund assets to procure
distribution and administrative services to plan participants.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
A) SECURITIES VALUATION
Equity securities, options and futures contracts are valued based on market
quotations. Equity securities traded on a national exchange, foreign exchange or
over-the-counter markets are valued daily at the last sales price. Equity
securities traded on the Nasdaq system are valued at their official closing
price. If there was no sale on such day, the securities are valued at the mean
between the most
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
A) SECURITIES VALUATION (CONTINUED)
recently quoted bid and asked prices. Debt securities with remaining maturities
of more than 60 days are valued using an independent pricing service. Debt
securities which mature in 60 days or less are valued at amortized cost, which
approximates market value. Investments in mutual funds are valued at their net
asset value as of the close of the New York Stock Exchange on the date of
valuation. The Funds value securities or assets without readily-available market
quotations at fair value under their established procedures approved by the
Board of Directors. A Fund may also use fair value pricing if it determines that
the market quotation is not reliable. For example, a Fund may use fair value
pricing for a foreign security if a significant event affecting its value occurs
between the closing of the exchange and the time the Fund values its shares.
B) FINANCIAL INSTRUMENTS
The Funds may utilize futures contracts, options, and forward foreign currency
contracts to manage their exposure to the equity and bond markets and to
fluctuations in interest rates and currency values and for investment purposes.
The primary risks associated with the use of these financial instruments are (a)
an imperfect correlation between the change in market value of the other
securities held by the Funds and the change in market value of these financial
instruments, (b) the possibility of an illiquid market, and (c) the
non-performance of the counterparties under the terms of the contract. As a
result, the use of these financial instruments may involve, to a varying degree,
risk of loss in excess of the amounts recognized in the statements of assets and
liabilities.
C) FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts, if
applicable, are recognized as assets due from the broker. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the value of the contract at the end of each day's trading. Changes in values
resulting in unrealized gains or losses are recorded as a variation margin and
settled daily with the broker through cash receipts or cash payments,
respectively. Gains and losses are realized upon the expiration or closing of
the futures contract. At December 31, 2004, the Funds had segregated sufficient
cash and/or securities to cover margin requirements on open future contracts.
D) OPTIONS
The premium paid by a Fund for the purchase of a call or put option is included
in the Fund's statement of assets and liabilities as an investment and
subsequently marked-to-market to reflect the current market value of the option
purchased. If an option which the Fund has purchased expires on its stipulated
expiration date, the Fund realizes a loss for the amount of the cost of the
option. If the Fund enters into a closing transaction, it realizes a gain or
loss, depending on whether the proceeds from the sale are greater or less than
the cost of the option. If the Fund exercises a put option, it
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
D) OPTIONS (CONTINUED)
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. If the
Fund exercises a call option, the cost of the security which the Fund purchases
upon exercise will be increased by the premium originally paid.
The premium received by a Fund for a written option is recorded as a liability.
The liability is marked-to-market based on the option's quoted daily settlement
price. When an option expires or the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security and the
liability related to such option is eliminated. When a written call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund is
obligated to purchase.
E) FORWARD FOREIGN CURRENCY CONTRACTS
The Funds may enter into forward foreign currency contracts to manage their
exposure to fluctuations in certain foreign currencies. The Diversified Bond
Fund may enter into forward foreign currency contracts for investment purposes
as well. A forward currency contract is a commitment to purchase or sell a
foreign currency at a future date at a set price. The forward currency contracts
are valued at the forward rate and are marked-to-market daily. The change in
market value is recorded by the Fund as an unrealized gain or loss. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. In addition to the risks of financial
investments mentioned above, risks arise from unanticipated movements in
currency values.
F) REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with institutions that the
Manager or the relevant subadvisor has determined are creditworthy wherein the
seller and the buyer agree at the time of sale to a repurchase of the security
at a mutually agreed upon time and price. The Funds will not enter into
repurchase agreements unless the agreement is fully collateralized. Securities
purchased subject to the repurchase agreement are deposited with the custodian
and, pursuant to the terms of the repurchase agreement, must have an aggregate
market value at least equal to the repurchase price plus accrued interest. If
the value of the underlying securities falls below the value of the repurchase
price plus accrued interest, the seller is required to deposit additional
collateral by the next business day. If the request for additional collateral is
not met, or the seller defaults on its repurchase obligation, the Funds maintain
the right to sell the underlying securities at market value and may claim any
resulting loss against the seller. Repurchase agreements could involve certain
risks in
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
F) REPURCHASE AGREEMENTS (CONTINUED)
the event of default or insolvency of the other party, including possible delays
or restrictions upon the Fund's ability to dispose of the underlying securities.
G) CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the rate of exchange at the end of the period. Purchases and
sales of securities are translated at the rates of exchange prevailing when such
securities were acquired or sold. Income is translated at rates of exchange
prevailing when accrued.
The Funds do not isolate that portion of currency gains and losses resulting
from changes in foreign exchange rates on investments denominated in foreign
currencies from the fluctuations arising from changes in market prices of these
investments held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of foreign short-term securities and foreign currencies, including
forward contracts, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference in the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's books,
from the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities denominated in foreign currencies other than investments
in securities at fiscal year end, resulting from changes in the exchange rate
and changes in the value of forward foreign currency exchange contracts held.
H) DOLLAR ROLL TRANSACTIONS
The Funds may enter into dollar roll transactions with financial institutions to
take advantage of opportunities in the mortgage backed securities market. A
dollar roll transaction involves a simultaneous sale by the Fund of securities
that it holds with an agreement to repurchase substantially similar securities
at an agreed upon price and date, but generally will be collateralized at time
of delivery by different pools of mortgages with different prepayment histories
than those securities sold. These transactions are accounted for as purchase and
sales transactions. During the period between the sale and repurchase, the Fund
will not be entitled to receive interest and principal payments on the
securities sold. Dollar roll transactions involve risk that the market value of
the security sold by the Fund may decline below the repurchase price of the
security. These transactions also present a risk from the potential inability of
counterparties to meet their contractual obligations.
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
I) TAXES
It is the Company's policy to comply with the provisions of the Internal Revenue
Code Subchapter M applicable to a regulated investment company. Under such
provisions, the Company will not be subject to federal income tax as the Company
intends to distribute as dividends substantially all of the net investment
income, if any, of each Fund. The Company also intends to distribute annually
all of its net realized capital gains of each Fund. Such dividends and
distributions are automatically reinvested in additional shares of the Funds.
J) DISTRIBUTIONS
Dividends from net investment income and capital gains distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from U.S. generally accepted accounting principles. As a result,
dividends and distributions differ from net investment income and net realized
capital gains due to permanent and temporary differences, primarily the deferral
of losses due to wash sales. Distributions which were the result of permanent
differences between book and tax amounts, primarily due to the differing
treatment of foreign currency transactions and the inability to carry net
operating losses forward to future years, have been reclassified among
additional paid-in capital, undistributed net investment income and accumulated
net realized gains.
K) SECURITIES TRANSACTIONS
Investment transactions are recorded based on the trade date. Realized gains and
losses are determined on the identified cost basis. Dividend income is recorded
on the ex-dividend date. Interest income, including amortization of premium and
accretion of discount on securities, is recorded daily.
L) SECURITIES LENDING
The Funds may lend their securities to qualified brokers. The Company and the
Board of Directors closely monitor the credit quality of the qualified brokers.
The loans are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan including
accrued income. As with any extensions of credit, the Funds may bear the risk of
delay in recovery or even loss of rights in the collateral if the borrowers of
the securities fail financially. The Funds receive compensation for lending
their securities which is included in net investment income on the Statements of
Operations (see Note 3).
M) ALLOCATION OF OPERATING ACTIVITY
Investment income, common expenses and realized and unrealized gains and losses
are allocated among the share classes of the Funds based on the relative net
assets of each class. Administration Service fees and distribution fees, which
are directly attributable to the R Shares, are charged to the R Shares
operations.
139
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
N) RECLASSIFICATIONS
Certain amounts in the prior period have been reclassified to conform to the
current period presentation.
NOTE 3. MANAGEMENT, SUBADVISORY AND TRANSACTIONS WITH AFFILIATES The Company has entered into a management agreement with CitiStreet Funds
Management LLC ("CFM"), pursuant to which CFM manages the investment operations
of the Company and administers the Company's affairs. Each Fund pays CFM a fee
for its services that is computed daily and paid monthly at an annual rate of
0.25% of the Fund's average net assets. The Company and CFM have entered into
subadvisory agreements for investment advisory services in connection with the
management of each of the Funds. CFM supervises the subadvisors' performance of
advisory services and will make recommendations to the Company's Board of
Directors with respect to the retention or renewal of the subadvisory
agreements. CFM pays for the cost of compensating officers of the Company,
occupancy, and certain clerical and accounting costs of the Company. The Company
bears all other costs and expenses. Each Fund pays its respective subadvisor(s)
directly.
CFM's management fees for the year ended December 31, 2004 were $5,792,753.
During the year ended December 31, 2004, the Funds also paid $6,824,753 to the
subadvisors.
Each Fund pays its subadvisor a fee that is computed daily and paid monthly at
the annual rates specified below based upon the value of the Fund's average
daily net assets allocated to that subadvisor.
[Enlarge/Download Table]
FUND & SUBADVISOR SUBADVISOR'S FEE
----------------------------------------------------------- -----------------------------------------------------------
International Stock Fund
- Bank of Ireland Asset Management (U.S.) Limited - 0.45% for first $50 million in assets, plus
- 0.40% for next $50 million in assets, plus
- 0.30% for assets over $100 million
- Citigroup Asset Management Limited(#) - 0.55% for first $50 million in assets, plus
- 0.50% for next $50 million in assets, plus
- 0.45% for assets over $100 million
- SSgA Funds Management, Inc.(#) - 0.55% for first $50 million in assets, plus
- 0.50% for next $50 million in assets, plus
- 0.45% for assets over $100 million
140
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
The Company has entered into an administrative agreement with CFM pursuant to
which CFM is responsible for recordkeeping, subaccounting and other
administrative services for R Shares shareholders. CFM receives an
administrative services fee at an annual rate of up to 0.10% of the average
daily net assets of the R Shares for such services to investors in the R Shares.
CFM does not currently charge an administrative service fee to investors in the
I Shares.
The Company has entered into a distribution and shareholder service agreement
with CitiStreet Equities LLC, the Funds' distributor and an affiliate of CFM,
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the Plan
of Distribution, the R shares of each Fund may pay CitiStreet Equities LLC an
annual rate of up to 0.25% of the average daily net assets of the R Shares as
compensation for distribution and shareholder services.
State Street Bank & Trust Company ("State Street"), an affiliate of CFM, is the
custodian of the assets and the accounting services agent for the Funds. In that
capacity, State Street has agreed to provide custodial and accounting services
to, and keep the accounts and records of, the Company. For the year ended
December, 31, 2004 State Street has been compensated by the Funds $1,391,755 for
these services. State Street also assists CFM in providing certain
administrative services for the Company, for which CFM and not the Company,
reimbursed State Street.
Boston Financial Data Services ("BFDS"), an affiliate of CFM, serves as the
Company's transfer agent and dividend disbursing agent. For the year ended
December 31, 2004the Company paid BFDS $108,763 for these services.
State Street Global Securities Lending ("SSGL"), an affiliate of CFM, serves as
the securities lending agent for the Company. SSGL receives compensation as the
Company's lending agent and pays the Funds a fee in return for the lending of
their securities to qualified counterparties. For the year ended December 31,2004, SSGL received compensation and the Funds earned income as follows:
[Enlarge/Download Table]
Compensation Income Earned
------------ -------------
International Stock Fund.................................... $337,396 $340,967
Small Company Stock Fund.................................... 163,097 162,826
Large Company Stock Fund.................................... -- --
Diversified Bond Fund....................................... 204,937 194,110
142
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
At December 31, 2004, the Funds market value of securities on loan and value of
collateral received for securities loaned was as follows:
[Enlarge/Download Table]
Market Value of
Loaned Securities Collateral Value
----------------- ----------------
International Stock Fund.................................... $ 87,709,073 $ 92,572,948
Small Company Stock Fund.................................... 92,381,187 95,248,719
Large Company Stock Fund.................................... -- --
Diversified Bond Fund....................................... 183,236,661 186,615,840
The Large Company and International Stock Funds paid brokerage commissions to
affiliated broker/ dealers for portfolio transactions executed on behalf of the
Funds. For the year ended December 31, 2004, Large Company Stock Fund paid
commissions to Citigroup Global Markets and State Street Brokerage Services of
$11,507 and $249, respectively. International Stock Fund paid Citigroup Global
Markets $741, for the year ended December 31, 2004.
NOTE 4. BROKERAGE RECAPTURE ARRANGEMENTS
The International Stock Fund, Small Company Stock Fund and Large Company Stock
Fund have entered into brokerage recapture arrangement with certain
broker-dealers. The broker-dealers have agreed to pay certain Fund expenses in
exchange for the Fund directing a portion of the fund brokerage to these
broker-dealers. In no event would a Fund pay increased commissions or receive
inferior execution of transaction for executing transaction with these certain
broker/dealers.
Under these arrangements for the year ended December 31, 2004, broker-dealers
paid custodian expenses for the International Stock Fund, the Small Company
Stock Fund and the Large Company Stock Fund of $26,710, $7,386 and $116,087,
respectively.
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
NOTE 7. DELAYED DELIVERY TRANSACTIONS
The Diversified Bond Fund may purchase and sell securities on a when-issued or
forward commitment basis. Payment and delivery may take place a month or more
after the date of the transactions. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The Fund instructs its custodian to
segregate securities having a value at least equal to the net amount of the
purchase commitments.
NOTE 8. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Subsequently,
securities of some foreign issuers may be less liquid and more volatile than
domestic issuers due to political and economic instability and lenient
governmental supervision and regulation.
NOTE 9. FEDERAL INCOME TAXES
For federal income tax purposes, the Funds indicated below have a capital loss
carryforward as of December 31, 2004 which is available to offset future capital
gains, if any.
[Download Table]
Capital Loss Carryforward Expiration Date
------------------------- ---------------
International Stock Fund..... $ (34,710,100) 2010
(36,604,478) 2011
-------------
(71,314,578) --
=============
Large Company Stock Fund..... $ (38,187,584) 2009
(54,462,464) 2010
$ (8,067,838) 2011
-------------
$(100,717,886)
=============
Diversified Bond Fund........ $ (9,549,547) 2009
-------------
$ (9,549,547)
=============
145
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Notes to Financial Statements
CitiStreet Funds, Inc. / December 31, 2004 (continued)
Tax Information (Unaudited)
For the year ended December 31, 2004, the International Stock Fund elected,
pursuant to Section 853 of the Internal Revenue Code, to pass through foreign
taxes to their shareholders. Gross foreign source Income and foreign taxes
passed through with respect to this election are $9,518,999 ($0.27 per share)
and $1,286,614 ($0.04 per share), respectively
Of the distributions made by the Funds for the year ended December 31, 2004, the
percentages which will qualify for the dividends received deduction available to
corporate shareholders for the International Stock Fund, the Small Company Stock
Fund, the Large Company Stock Fund, and the Diversified Bond Fund are 0%, 100%,
100% and 0%, respectively.
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Report of Independent Registered Public Accounting Firm
CitiStreet Funds, Inc.
The Board of Directors and Shareholders CitiStreet Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of International Stock Fund, Small Company Stock
Fund, Large Company Stock Fund and Diversified Bond Fund, Portfolios of
CitiStreet Funds, Inc. (the Company), as of December 31, 2004, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years or periods in the five-year period
then ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2004 by correspondence with the custodian
and brokers, or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
International Stock Fund, Small Company Stock Fund, Large Company Stock Fund and
Diversified Bond Fund as of December 31, 2004, the results of their operations
for the year then ended, the changes in their net assets for each of the years
in the two-year period then ended, and their financial highlights for each of
the years or periods in the five-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
February 16, 2005
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ADDITIONAL REPORTS AND PROXY VOTING (UNAUDITED)
The CitiStreet Funds file their complete schedule of portfolio holdings
with the Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Form N-Q reports for the
CitiStreet Funds are available on the SEC's website at http://www.sec.gov or may
be reviewed and copied at the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may obtained by
calling 1-800-SEC-0330.
The policies and procedures that the CitiStreet Funds use to determine
how to vote proxies relating to portfolio securities, plus information regarding
how the CitiStreet Funds voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30, are both available without
charge, upon request by calling toll free 1-800-242-7884 or on the SEC's website
at http://www.sec.gov.
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DIRECTORS AND OFFICERS (UNAUDITED)
The following table lists the Company's directors and officers; their address
and age; their position with the Company; the length of time holding that
position with the Company; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies. The Company's Statement of
Additional Information includes additional information about the Company's
directors and is available, without charge, upon request by writing Citistreet
Funds at Two Tower Center, East Brunswick, NJ08816 or calling toll free
1-800-242-7884.
Interested Directors
[Enlarge/Download Table]
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND OTHER
POSITION(S) LENGTH OF COMPLEX DIRECTORSHIPS
HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
NAME, ADDRESS, AND AGE FUND SERVED** DURING PAST 5 YEARS DIRECTOR DIRECTOR
-------------------------- ----------- ---------- -------------------------- ------------- -------------
Robert C. Dughi* Chairman of 11 years Through January 2005, Four None
400 Atrium Drive the Board Chairman of the Board and
Somerset, NJ08873 Chief Executive Officer,
Age: 57 CitiStreet Retirement
Services LLC and various
affiliates. Also through
January 2005, Chairman of
the Board and President of
CitiStreet Financial
Services LLC and the
Manager.
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Principal Officers who are Not Directors
[Enlarge/Download Table]
TERM OF
OFFICE AND NUMBER OF
POSITION(S) LENGTH OF PORTFOLIOS IN
HELD WITH TIME PRINCIPAL OCCUPATION(S) FUND OTHER
NAME, ADDRESS, AND AGE FUND SERVED** DURING PAST 5 YEARS COMPLEX DIRECTORSHIPS
-------------------------- ----------- ---------- -------------------------- ------------- -------------
Paul S. Feinberg President 11 years Executive Vice President Four None
400 Atrium Drive and General Counsel,
Somerset, NJ08873 CitiStreet Retirement
Age: 62 Services LLC. Also, Senior
Vice President and General
Counsel of CFS, the
Manager and various
affiliates.
Matthew Riordan Treasurer, 1 year Senior Vice President, Four None
400 Atrium Drive Chief Controller and Treasurer,
Somerset, NJ08873 Financial CitiStreet Retirement
Age: 39 Officer and Services LLC. Also, Senior
Chief Vice President, Controller
Accounting and Treasurer of CFS, the
Officer Manager and various
affiliates. Prior to June
2004, Vice President,
Finance, Merrill Lynch &
Co.
Lori M. Renzulli Secretary 7 years Vice President and Four None
400 Atrium Drive Counsel, CitiStreet
Somerset, NJ08873 Retirement Services LLC
Age: 39 and various affiliates.
---------------
* Mr. Dughi is an interested director because he is an employee of the
Company's investment adviser and its affiliates.
** There is no set term of office for the Company's directors and officers. The
table lists the number of years the person has served the Company in the
listed capacity.
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[THECITISTREET(SM)FUNDS LOGO] [GLOBE GRAPHIC]
(C) Copyright 1993-2005 CitiStreet Funds Management LLC
This annual report must be preceded or accompanied by the prospectus for the
CitiStreet Funds
for individuals that are not current shareholders of the Funds.
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ITEM 2. Code of Ethics
As of the end of the period covered by this Form N-CSR, the
registrant has adopted a code of ethics (as defined in Item 2(b) of
Form N-CSR) that applies to the registrant's principal executive
officers and principal financial and accounting officer (the
"Code"). The Code was approved by the registrant's board of
directors on November 14, 2003. During the period covered by the
report, there was no amendment to the Code or any waivers granted
from its provisions. A copy of the Code is filed with this report as
an exhibit.
ITEM 3. Audit Committee Financial Expert
Linda Walker Bynoe, who was the registrant's "audit committee
financial expert" as defined in Item 3 of Form N-CSR, resigned from
the Board of Directors effective February 28, 2005. Because the
registrant has not yet found a replacement for Ms. Bynoe, the
registrant's board of directors currently has no "audit committeefinancial expert." However, the registrant's board of directors is
considering adding a director with the requisite experience.
ITEM 4. Principal Accountant Fees and Services
(a)-(d) The following chart shows the aggregate fees billed in each of the
last two fiscal years for services rendered by the registrant's
principal accountant, KPMG, LLP ("KPMG").
[Download Table]
2003 2004
---- ----
Audit Fees* $ 86,000 $115,000
Audit-Related Fees 0 0
Tax Fees** $ 16,000 $ 17,000
All Other Fees 0 0
*Audit fees include all services related to the audit of the
financial statements, including review of the registration statement
and the issuance of related consents.
**Tax fees include review of the registrant's tax filings.
(e)(1) The registrant's Audit Committee Charter provides that the Audit
Committee has the duty and power to pre-approve audit and
non-audit services provided by the independent accountant as
required by law; provided, however, that the Chairperson of the
Audit Committee shall have the authority to grant pre-approvals
of audit and non-audit services subject to the requirement that
any such pre-approval shall be presented to the full Audit
Committee at its next scheduled meeting.
(e)(2) No services in 2003 or 2004 were approved by the Audit Committee
pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.
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(f) Not applicable.
(g) The following chart shows the aggregate non-audit fees billed by
KPMG for services rendered to the registrant and rendered to
registrant's investment adviser, CitiStreet Funds Management LLC,
and any entity controlling, controlled by, or under common control
with CitiStreet Funds Management LLC that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant.
[Download Table]
2003 2004
---- ----
Non-Audit Fees 0 0
(h) Not applicable.
ITEM 5. Audit Committee of Listed Registrants
Not applicable.
ITEM 6. Schedule of Investments
Not applicable.
ITEM 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
ITEM 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
ITEM 9 Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
Not applicable.
ITEM 10 Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 11. Controls and Procedures
(a) Within the 90-day period prior to the filing date of this report,
the registrant's chief executive and financial officers evaluated
the registrant's disclosure controls and procedures (as defined in
Rule 30a-3(c) under the Investment Company Act
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of 1940). Based upon that evaluation, the registrant's chief
executive and financial officers concluded that the registrant's
disclosure controls and procedures are functioning effectively to
provide reasonable assurance that the registrant can meet its
obligations to disclose in a timely manner material information
required to be included in the registrant's reports on Form N-CSR.
(b) There have been no significant changes in the registrant's internal
control over financial reporting or in other factors which could
significantly affect internal control over financial reporting
subsequent to the date the chief executive and financial officers
carried out their evaluation.
ITEM 12. Exhibits
(a)(1) Code of ethics
(a)(2) Certifications pursuant to Rule 30a-2(a) by the chief executive and
financial officers.
(b) Certification pursuant to Rule 30a-2(b) and Section 906 by the chief
executive and financial officers.
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